Alternatives to Payday Loans
When you’re in need of a quick loan, payday loans are a quick way to get the fast access to the cash you need. But they often come with high-interest rates and fees.
If you do intend to borrow money, it’s always a good idea to search for the best terms and interest rates you can get based on your current financial situation and creditworthiness.
Let’s explore five alternatives that may have better terms and interest rates than payday loans.
1. Credit Union Loans
Credit union loans are a good alternative to payday loans. They offer loans with much lower interest rates and fees. If you want to apply for an unsecured loan, most credit unions require you to be a member for at least 13 weeks to establish a savings track record before you can apply. This might not be an ideal option if you need cash urgently. However, credit unions do offer secured loans that you can apply for instantly after you become a member. These loans require you to use personal property as collateral, such as property or a certificate of deposit.
|Pros of Credit Union Loans
|Cons of Credit Union Loans
|Lower interest rates and fees (typically no more than 3% each month)
|Membership requirements and 13 weeks waiting period
|No minimum credit score requirement to apply for a loan
|Collateral required for secured loans
|Access to financial education and counseling services
|Limited branch locations, which may not be available in your area
Credit unions offer you a sustainable way to borrow money while helping you save and establish a long-term borrowing relationship with them.
2. Salary Advances
If you’re an employee in need of quick cash before your next payday, consider a salary advance as an alternative to payday loans.
Some employers offer salary advances as a benefit of working for them without added interest or fees. You should check to confirm if your employer offers salary advances or would be willing to give you a salary advance to help you overcome your financial hurdle until your next payday.
There are a number of online lenders that offer salary advance loans. These lenders are very similar to payday loans with comparable terms, but the interest rates are relatively low, ranging between 3% to 30% APR.
|Pros of Salary Advances
|Cons of Salary Advances
|Many employers do not charge interest on salary advance amounts
|Asking your employer for an advance can feel uncomfortable
|Repayment is easy as it’s deducted from your future paycheck
|You can only borrow a percentage of your upcoming salary, so it’s not suitable for large amounts
|Online lenders that provide salary advances have much much lower APR rates than payday lenders
|The interest rate from a salary advance lender is still relatively high compared to bank rates
A salary advance is a quick way to help you overcome a financial hurdle. While it might feel a bit uncomfortable to ask your boss for a salary advance, it could save you hundreds of pounds in interest, making it worth considering.
3. Borrow from Family and Friends
When you find yourself in need of cash and want to avoid resorting to a payday lender, consider seeking assistance from family and friends. They may be willing to loan you money at zero or low interest, sparing you having to pay the high interest rates associated with payday lenders.
However, it’s essential to approach this option with care and establish a clear repayment plan to safeguard your relationship with the friend or family member who lends you the money.
You can suggest using a friends and family borrowing app like justlend.co, which allows you to formalize the agreement and set up a repayment plan. This step demonstrates your commitment to repaying the loan and may make your friend or family member feel more comfortable about lending you the money.
|Pros of Borrowing from Family and Friends
|Cons of Borrowing from Family and Friends
|Zero or low-interest rates
|May feel uncomfortable or embarrassing to ask for money
|Fast access to cash
|Informal borrowing process
|No credit check or strict eligibility criteria to pass to get the loan
|Risk of damaging personal relationships if repayment issues arise
4. Personal Installment Loans
Another potential alternative to payday lending is personal installment loans. These loans let you borrow a fixed amount of cash, but you get more time to pay it back, typically spanning from 6 to 24 months. That’s longer than the typical payday loan, which usually gives you up to 9 months to repay. Although personal installment loans usually have slightly lower interest rates than payday loans, they are still high, around 49.9% to 79.9% APR. Also, be cautious because some online lenders offering these types of loans are actually payday lenders. They might charge much higher APR than 79.9%. So, make sure to do your research and compare online lenders offering personal installment loans to find one with the lowest interest rates and APR, then compare it with payday lenders to confirm you’re getting more favourable terms.
|Pros of Personal Installment Loans
|Cons of Personal Installment Loans
|Slightly lower interest rates (49.9% to 79.9% APR)
|Some online lenders offering personal installment loans are payday lenders and charge much higher than 79.9% APR
|Longer time to payback 6 – 24 months
|Fees and penalties can be high if you miss repayments
|Smaller monthly payments for easier budgeting
|Still much higher interest rates compared to traditional bank loans
|Potential to borrow larger loan amounts compared to payday loans
|Risk of accumulating high interest charges over the longer term
5. Request a Payment Extension from Creditors
If the reason you were considering a payday loan was to cover a pressing expense like an unpaid electric or utility bill, it’s worth considering reaching out to the creditor and asking for a grace period until your next payday. Since the time extension you are going to ask for is short, just until your next payday, creditors are often willing to work with you by extending your due date on your bill. While it might feel uncomfortable to contact a creditor, it has the potential to save you significantly on the interest rates you would have to pay if you opted for a payday loan.
|Pros of requesting payment extensions from creditors
|Cons of requesting payment extensions from creditors
|By requesting a payment extension, you can potentially save money on the high-interest rates associated with loans
|Initiating contact with creditors can be uncomfortable for some individuals.
|It provides short-term financial relief until your next paycheck arrives
|Not all creditors may be willing to grant payment extensions, especially if you have a history of late payments
|You won’t accumulate more debt, unlike taking out a loan.
|Payment extensions offer temporary relief and may not address underlying financial issues
6. Emergency Budgeting
When an unexpected expense pops up, and your first thought is to consider a payday loan to solve the problem, it’s worth taking a moment to create an emergency budget. Start by examining your current financial situation, prioritizing essential expenses, and thinking about ways to cut back on non-essentials. Additionally, as mentioned earlier, you can try reaching out to your monthly creditors, such as your rent provider, to see if they’d be willing to extend your payment due date. This approach can give you the financial breathing room you need until your next payday arrives and help you avoid getting into unnecessary debt.
|Pros of Emergency Budgeting
|Cons of Emergency Budgeting
|You may be able to find the extra money you need within your new budget
|It can be challenging to stick to a strict budget
|Having a plan in place can reduce financial stress and anxiety
|Constantly monitoring and adjusting your budget can be emotionally stressful
|You become more aware of your spending habits
|You may not be able to find the extra money you need even if you try to implement an emergency budget
The Bottom Line
When facing a financial hurdle and contemplating payday loans, exploring alternatives can save you money and provide more favorable terms. Credit union loans offer sustainable borrowing options with lower interest rates and fees, helping build a long-term financial relationship. Salary advances, whether through your employer or online lenders, provide quick relief without the high interest associated with payday loans.
Borrowing from family and friends can be a zero or low-interest solution, but maintaining clear repayment plans is essential to preserve personal relationships. Personal installment loans offer longer repayment periods, but conducting careful research is necessary to avoid high APRs from certain lenders. Requesting payment extensions from creditors can provide short-term financial relief, although it may not be universally granted.
Emergency budgeting can help avoid unnecessary debt by prioritizing essential expenses and seeking extensions from creditors when possible. These alternatives offer better terms and lower financial burdens compared to payday loans and are really worth considering.